Information

Background

Euronext would like to consult on proposed changes to the methodology of the CAC 40 ESG. 

In light of strategic developments at Moody’s ESG, Euronext is analysing the option of updating the methodology of the Index to use data provided by ISS-ESG. 

In addition there are further changes proposed in order to align the Index methodology with the ESMA guidelines on funds’ names using ESG or sustainability-related terms. Specifically int concerns the following two changes: 

  • Exclusion of companies that derive more than 10% of their turnover from fossil fuel.
  • Exclusion of companies that derive more than 50% of their turnover from fossil fuel power generation 

Furthermore in order to simplify the weighting methodology it is proposed to change towards an optimization method instead of the current iterative approach.  

If approved by the Independent Supervisor the changes to the methodology will become effective as of the March Review of the Index. 

Proposed changes related to the transition to ISS-ESG 

The following rule changes are proposed to be made to the CAC 40 ESG in order to transition to ISS-ESG as a data provider. The proposal aims at replacing the current step in the methodology with the corresponding data point by ISS-ESG. It concerns changes to the: 

  • Continuous eligibility screening
  • Eligibility screening at reviews
  • Selection ranking

Continuous eligibility screening

The following change is proposed to the continuous eligibility screening:

Current Rule:

Companies with active critical controversies related to UNGC as determined by Moody’s ESG Solutions are not eligible for the index. Each critical controversy remains active for 2 years or until Moody’s ESG Solutions analysis flags it as inactive or downgrades the severity, whichever occurs first. A Company with an active critical controversy cannot be included in the index during this period. Reference date to assess the 2 years period corresponds to the first announcement date of the critical controversy identified by Moody’s ESG Solutions.

Proposed new Rule:

Companies flagged as 'RED' by ISS are excluded.

Each controversy monitored by ISS remains active as long as there are updates on significant developments. If there is no new information for 3 years, the controversy severity is downgraded to 'AMBER'.

Eligibility screening at reviews

The following changes are proposed to the eligibility screening at reviews.

Current Rule:

ESG assessment/score

  • Companies in the Index Universe (CAC Large 60) are ranked in decreasing order by ESG score, as evaluated by Moody’s ESG Solutions, i.e. Companies with better ESG score will be preferred. Note that companies not covered by Moody’s ESG Solutions are ranked lowest.
  • In case of equal ESG score, the Company with the higher Free Float Market Capitalization will rank higher.
  • The bottom 20% of the Companies included in the Index Universe based on this rank are not eligible.

New proposed rule

  • Companies in the Index Universe (CAC Large 60) are ranked in decreasing order by ESG Performance score, as evaluated by ISS-ESG, i.e. Companies with better ESG Performance score will be preferred. Note that companies not covered by ISS-ESG are ranked lowest.
  • In case of equal ESG Performance score, the Company with the higher Free Float Market Capitalization will rank higher.
  • The bottom 20% of the Companies included in the Index Universe based on this rank are not eligible.

Activity exclusions

The following changes are made to the activity exclusions following the change to ISS-ESG as the data provider. Updated points are highlighted in

Current rule:

Companies that breach any of the following thresholds are not eligible. Note that companies not covered by Moody’s ESG Solutions are not eligible as well.

Exclusion type

Description

Revenues

UN Global Compact controversies
  • Companies with active critical controversies related to UNGC are excluded (As defined in “2.2 Continuous eligibility screening”).
 -
Tobacco
  • Companies with any involvement in the production of tobacco.
  • Companies with revenues above 10% derived from distribution of tobacco are excluded. 

>0%

≥10%

Coal
  • Companies with any involvement in Thermal Coal Mining are excluded.
  • Companies with revenues above 5% from  Coal-fuelled power generation are excluded.

>0%

≥5%

Tar sand and oil shale
  • Companies with any involvement in Tar sand and oil shale extraction are excluded.
>0%
Offshore arctic drilling
  • Companies with any involvement in Offshore arctic drilling are excluded.
>0%
Ultra-deep offshore drilling
  • Companies with any involvement in ultra-deep offshore drilling are excluded.
>0%
Coal-bed methane
  • Companies with any involvement in coal-bed methane are excluded.
>0%
Hydraulic fracturing
  • Companies with any involvement in hydraulic fracturing are excluded.
>0%
Civilian firearms
  • Companies with revenues above 5% derived from the production or sale of civilian firearms are excluded.
≥5%
Controversial Weapons
  • Companies that are involved in the following weapons considered as controversial by Moody’s ESG Solutions: biological weapons, chemical weapons, blinding laser weapons, incendiary weapons, non-detectable fragments, depleted uranium, white phosphorus., with involvement type Full weapons system – munitions, are excluded
  • Companies that are involved in the following weapons considered as controversial by Moody’s ESG Solutions: Anti-Personnel Landmines, cluster munitions, with involvement type Full weapons system – munitions or Key parts – munitions, are excluded

>0%

>0%

Proposed new rule:

Companies that breach any of the following thresholds are not eligible. Note that companies not covered by ISS-ESG are also not eligible.

Exclusion type

Description

Revenues

UN Global Compact controversies
  • Companies flagged as “RED” (As defined in “2.2 Continuous eligibility screening”).
 -
Tobacco
  • Companies with any involvement in the production of tobacco.
  • Companies with maximum percentage of revenues derived from distribution of tobacco above 10% are excluded. 

>0%

≥10%

Coal
  • Companies with any involvement in Thermal Coal Mining are excluded.
  • Companies with maximum percentage of revenues from  Coal-fuelled power generation are excluded above 5%.

>0%

≥5%

Oil sands
  • Companies with any involvement in Oil Sands are excluded.
>0%
Arctic drilling
  • Companies with any involvement in arctic drilling are excluded.
>0%
Deep water drilling
  • Companies with any involvement in Deep water drilling are excluded.
>0%
Hydraulic fracturing
  • Companies with any involvement in hydraulic fracturing are excluded.
>0%
Shale Energy
  • Companies with any involvement in Shale Energy are excluded
 
Civilian firearms
  • Companies with maximum percentage of revenues derived from the production or sale of civilian firearms above 5% are excluded.
≥5%
Controversial Weapons

Companies flagged as “RED” or  “AMBER” as determined by ISS are excluded. 

A ‘RED’ flag refers to a verified involvement in any of the following activities: Development, production, acquisition, stockpiling, retention, transfer of controversial weapons, assistance in any of these activities

 A ‘AMBER’ flag refers to either:

  • Companies that are verifiably involved in equipment enabling the use of controversial weapons
  • Companies that have a minority ownership of 20% to <50% of a company that is verifiably involved in controversial weapons, key components, or equipment enabling the use of controversial weapons

Companies for which there is an imminent involvement, due to imminent Merger & Acquisition operations, or strong indications about an involvement in controversial weapons, key components or equipment enabling the use of controversial weapons

The filter on controversial weapons from ISS cover the following weapons: 

biological weapons, chemical weapons,  incendiary weapons, depleted uranium, white phosphorus, Anti-Personnel Landmines, cluster munitions.

Selection Ranking

The following change will be made to the selection ranking rule: 

The eligible Companies are ranked by decreasing order on the ESG score as assigned by Moody’s ESG Solutions. In case of an equal score the Company that is already included in the index ranks better. In case of equal ranking,  the Company with the highest free float market capitalization will rank higher.

Proposed Updated rule: 

The eligible Companies are ranked by decreasing order on the ESG Performance score as assigned by ISS-ESG. In case of an equal score the Company that is already included in the index ranks better. In case of equal ranking,  the Company with the highest free float market capitalization will rank higher.

Proposed changes to align with the fund naming criteria

In order to align the index to the fund naming criteria it is proposed to add two additional criteria to the eligibility screening at reviews based on ISS-ESG data:

  • Companies that have a maximum turnover of more than 10% derived from fossil fuel (exploration, extraction, refining , processing, distribution) activities are not eligible 
  • Companies that derive more than 50% of their turnover from fossil fuel power generation are not eligible 

Proposed changes to the weighting method

The method for ensuring compliance with the impact objectives will be adjusted such that it is achieved with an optimization of the weighting method. 

As a result the following rule is removed: 

Final selection: verification of the impact objectives

The CAC 40 ESG aims at improving the Green-to-Brown ratio as well as the Weighted Average Carbon Footprint compared to the Index Universe. Both criteria are evaluated by Moody’s ESG Solutions.

Green-to-Brown ratio is defined as Company level weighted aggregation of Company revenue percentage related to green products and services (as evaluated by Moody’s ESG Solutions) divided by Company level weighted aggregation of Company revenue percentage related to brown products and services (as evaluated by Moody’s ESG Solutions). The weight is equal to the Company’s weight in the index.

Weighted average Carbon Footprint is defined as Company-level Scope 1+2 emission weighted by each Company’s weight in the index and then aggregated by summing.

Should, either or both of the indicators be left unimproved compared to the Index Universe, the place of the worst ESG scored Company will be vacated temporarily from the initial selection and put together with the other eligible stocks currently not in the index selection. The index selection will thus temporarily consists of 39 Companies and one vacated place. This vacated place will be iteratively filled with the stocks from outside of the index selection that are eligible for inclusion, in order of ESG ranking (higher ESG ranking preferred, higher FFMC preferred in case of ESG score tie). These iteration will give rise to new versions of the indices that will be checked in turn for the compliance with both impact objectives. This process is reiterated until the CAC 40 ESG index obtains a better result on both indicators. In case the iterations with one vacated place in the index are not sufficient, the worst 2 ESG scored Companies in the original selection will be vacated temporarily and put together with the other eligible stocks currently not in the index selection. The iteration will then consists of selecting a combination of 2 Companies out of a pool of 2 + number of stocks eligible outside the index. Same ESG and FFMC preference applies and process is iterative until the CAC ESG index meets the impact objectives.

Example:

 Initial CAC ESG index composed of 40 Companies, 4 other Companies are eligible but outside of the index due to initial ranking.

Iterations with vacating of 1 place and 2 places did not yield the impact objectives target, therefore iterations will now be done with 3 vacated places. The worst 3 ESG-ranked stocks in the initial 40 Companies in CAC ESG are put together with the 4 Companies that were initially eligible but outside of the index. The exercise will thus be to select a combination of 3 stocks out of 7 (3 + 4). Combinations with higher ESG scored-companies continue to be preferred.

It will be replaced by the following rule change on the Periodical weighting update: 

Current rule:

Capping Factor

A Capping Factor is calculated based on the Review Weightings Announcement Date such that the Companies included in the index have a maximum weight of 10%. 

Proposed new rule:

Capping Factor

A Capping Factor is calculated based on the Review Weightings Announcement Date such that the Companies included in the index have a maximum weight of 10%, and the Index complies with the impact objectives with the following methodology. 

The CAC 40 ESG aims at improving the Green-to-Brown ratio as well as the Weighted Average Carbon Footprint compared to the Index Universe. Both criteria are evaluated by ISS-ESG Solutions.

Green-to-brown ratio is defined as Company level weighted aggregation of Company revenue percentage derived from products or services with significant or limited contribution to SDG 13 Climate Action, divided by Company level weighted aggregation of Company revenue percentage derived from products or services with significant or limited obstruction to SDG 13 Climate Action. The weight is equal to the Company’s weight in the index.

Weighted average Carbon Footprint is defined as Company-level Scope 1+2 emission weighted by each Company’s weight in the index and then aggregated by summing.

A capping factor is calculated using an optimization method that satisfies the following objective function: 

With:

  •     = Weight of constituent i in the portfolio
  • = Free Float Market Cap Weight of constituent i in the portfolio
  • = Number of constituents in the portfolio

The constraints imposed are the following (unchanged compared to current methodology):

  • All weights are positive and sum to 1
  • All weights are capped at 10%
  • A reduction in WACI relative to Parent index (Scope 1+2)
  • A reduction in Green to brown ratio relative to Parent index 

Timelines:

Stakeholders will have till  31 December 2024 to react to the consultation. The new rules, if validated by Index Design and the Independent Supervisor of the Index, will be implemented as of the March 2025 Review of the Index. 

Questions
Do you agree with the proposed change to ISS-ESG as a data provider?
Do you agree with the proposal to exclude companies that derive more than 10% of their turnover from fossil fuel (upstream, midstream & downstream (refining, etc…) activities)?
Do you agree with the proposal to exclude companies that derive more than 50% of their turnover from fossil fuel power generation)?
Do you agree with the proposal to replace the current method of ensuring compliance with the verification objectives with an optimization approach ?
Do you agree with the proposed timelines?
Your details
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